Minerco Inc (MINE)

[Carini]

Here's a partial explanation, that I'm still working on so forgive any typos as it is a work in progress...

SHORT VOLUME

“Short volume” is not the same as “short interest” or “shorting.” The latter two describe a position that is taken in a stock, whereas the former usually represents (in the OTC at least) the first half of an order execution that is recorded as “short volume” even when the underlying trade is actually a long position. This is why daily “short volume” reports are almost entirely useless and do not actually reflect short selling on a ticker. Quite to the contrary, because of the way that large block sales are often executed and reported to the tape, an increase in short volume on an OTC ticker can often be a good indicator of increased share dumping by company insiders and/or toxic financiers, which obviously will depress the PPS. It should also be obvious why such entities like to use the “short volume” indicator to perpetuate the myth that such PPS drops are the result of “shorts” and “bashers” rather than the simpler explanation. Namely, that massive dilution and dumping is going on to the detriment of the naive and gullible shareholder, who is told to blame the boogeyman rather than the people telling him/her to “average down” and “keep buying!” despite the collapsing PPS, so as to not let the “shorts” and MM’s “win” and instead to “scare” them and force them to cover and so on.

Before we get to that, however, a little history. Before 2008, there was no disclosure to as how particular trades were initially executed. In fact, there was no reliable data as to the number of naked short sales within the market, and in particular abusive naked short sales were a concern. This is when these OTC “shorting” myths took root, but to the extent that any of them may have been valid at that time, it all changed with the financial reforms that occurred in the wake of the 2008 crash.

And some of those naked shorting concerns were very valid, despite the fact that the SEC did not see abusive naked short sales as a massive problem (and in was quoted saying something like “they are not an issue within our markets.”) Turns out that was false, as there were an alarming number of shares sold without delivery, and in some cases there were securities severely impacted by large numbers of abusive naked short sales – BEFORE 2008. So, as they like to do, the regulatory authorities imposed new rules to address the problem, and came up with a new way of reporting trade executions provide transparency to the entire transaction. In particular, two points in time are now paid attention to: (1) the initial execution of a trade; and (2) the final settlement of the trade.

Ok, now that we have that out of the way, we can move on to the OTC post-2008. As an initial matter, note that the OTC is a market, not an exchange, as many try to claim. In other words, the OTC is a quotation service that requires MMs to quote securities to provide a centralized place for Bids and Offers. Without MMs, you have a so-called “grey” market where there is virtually no order flow or liquidity. So for all the talk about the “evil” MM’s, they are an essential part of the OTC and it could not function without them. Indeed, each broker has an MM contracted to work for them to aid in execution of trades here in the OTC. As long a security has a Form 15 filed and/or is an exempted, unsolicited quote security, the MMs can quote offers for their customers. That is all MMs do here—quote customer orders—they do not buy/sell OTC securities for their own profit, as they make plenty from commissions on customer orders with none of the risk. That is why what is often attributed to MM “manipulation” to “get cheap shares” down here is actually just MM’s selling huge blocks of shares for their customers, i.e., the company and its officers/associates, toxic financers, and/or frontloaded or paid promoters who are looking to dump a lot of shares onto the unwitting public that are told to blame the MM’s rather than the customers on whose behalf the MM’s are buying/selling.

In addition, note that the OTC market and all its daily transactions are entirely electronic -- from the initial trade execution to its settlement -- and require no human intervention or input to operate. Really, there are only two reasons why an actual human being would get involved with an actual trade execution: (1) you phone in a specialized order; or (2) a trading error occurs that requires manual reconciliation. Unlike the popular image of brokers barking orders at each other on a real-live trading floor, these days the clearing and settlement process requires no human intervention as long as a security is in the Continuous Net Settlement system (“CNS”) (see here for more info: http://www.dtcc.com/clearing-services/equities-clearing-services/cns.aspx). This is also why DTC eligibility is so important, as it allows a ticker’s booking/accounting/clearance/settlement to be completely hands-free.

Now back to the regulators and the short reports. The SEC has rules in the 200-series that cover short sales, in particular Rules 200, 201, 202T and 203. The main two here for our purposes are Rules 200 and 203, with Rule 200 defining both short sales and ownership. You can find everything concerning SEC Rules 200-203, including the following quotations, here: http://www.sec.gov/rules/final/34-50103.htm

In all of this, it is essential to understand that, in the case of MMs working the OTC, virtually none of them own the shares when making a market here. Their job is to “make a market,” not trade in it, and accordingly their goal is to end each day holding nothing but a nice pile of transaction fees, not risky shares of OTC stocks.

That said, with the new rules that were implemented the SEC applied the marking requirements for big-board securities to OTC securities for the first time:

Quote:

Since the new marking requirements apply to all equity securities, not just exchange-listed securities, we are removing them from current Rule 10a-1. The new order-marking requirements differentiate between "long," "short," and "short exempt" orders for all exchange-listed and over-the-counter equity securities.

This was a significant change from the old system:

Quote:

Under the former marking requirements in Rule 10a-1(d), a broker-dealer could only mark an order to sell a security "long" if the security was carried in the account for which the sale is to be effected, or the broker-dealer is informed that the seller owns the security to be sold, and will deliver the security to the account for which the sale is effected as soon as possible without undue inconvenience or expense. We [the SEC] . . . proposed changing the marking requirement so that a sale could only be marked "long" if the seller owns the security being sold and either the security to be delivered is in the physical possession or control of the broker-dealer, or will be in the physical possession or control of the broker-dealer prior to settlement of the transaction.


In other words, under the old rules, a MM (i.e., “broker-dealer”) could sell an OTC security owned by its customer and mark it as a “long” transaction so long as its customer’s account had actual physical possession of the underlying security (i.e., the physical stock certificate). The MM could thus act as a sort of “middle-man” to make the “long” sale (i.e., the sale of a security actually owned by its customer), and take its fee without actually ever handling or possessing the physical security itself.

Under the new rules, however, the MM is required to have physical possession of the security in order to mark a sale as “long.” Now, even if the MM is selling shares owned by its customer (i.e. even if it is not a “short sale” of borrowed shares but a “long sale” of a customer’s actual shares), it must mark the sale as “short” if it is not going to take physical possession of the stock certificates within the 3-day settlement period. Thus, marking an OTC trade “short” is simply a way of defining physical ownership of the security.

Getting to the meat of it, here are some examples of trades that require being marked short. Let’s use a generic trading symbol, XXXX:

Typical everyday trade, I have 20,000 shares of XXXX for sale on the Ask, you however want to purchase 10,000 of the shares at my price. So you enter your order and it is sent to your broker to execute. First thing is a broker electronically checks to see if there are current sell orders that match your request, if not it is off to the ECN. As I stated earlier each broker has an MM working for them to execute trades, the MM for your broker sees your order and knows I have 20,000 shares for trade. Here is where MMs “create” liquidity and order flow, the ECN matches perfect blocks like trade for trade, size and price are automatic initiated trades. In this case you only want 10,000 shares, so immediately the MM sells your broker 10,000 shares short and marks the trade as “short” although you are long in the trade, this gets reported to the Daily Reg SHO report and also on the consolidated tape.

Now nearly simultaneously on a separate leg of the very same trade transaction the MM is buying the cover from my 20,000 share block, and purchases 10,000 shares from me. This gets reported in the Non Tape Transactions Report and both Non tape and consolidated tape are both sent to FINRA for balancing and reconciliation.

The Daily Reg SHO only reports how the trade was initially executed and it does not reconcile based upon the fact the trade was covered as that will be taken care of in another report. Regulators only want to know exactly how the trade was initially executed and that is it. The trade goes off to the DTC and NSCC for clearing and settlement since it is a CNS security and is cleared and settled. According to SEC reports 98% of all trades are cleared and settled within the same day of trade or T+0. Of course regulators give T+3 for settlement, that is trade day plus 3 days for settlement, once it exceeds that it becomes an FTD (Fails to Deliver).

This report is the end of the entire trade transaction, and once a trade goes T+4 it gets placed on the FTD report. Now many will tell you that if it is on the FTD it means it was either shorted or abusively naked shorted. Both are in fact wrong and the SEC provides clarity as to what the data does not imply:

Quote:

Please note that fails-to-deliver can occur for a number of reasons on both long and short sales. Therefore, fails-to-deliver are not necessarily the result of short selling, and are not evidence of abusive short selling or “naked” short selling.

http://www.sec.gov/foia/docs/failsdata.htm

So here it is clear as day that the data does not imply anything towards what happened to fail on settlement there are multiple reasons that cause FTDs including error trades and so forth. But there are also trades enacted by financiers in these securities that cause FTDs and even threshold flags to occur, that is covered by SEC Rule 203:

Quote:

Rule 203(b)(1) for situations where a broker-dealer effects a sale on behalf of a customer that is deemed to own the security pursuant to Rule 200, although, through no fault of the customer or the broker-dealer, it is not reasonably expected that the security will be in the physical possession or control of the broker-dealer by settlement date, and is thus a "short" sale under the marking requirements of Rule 200(g) as adopted.70 Such circumstances could include the situation where a convertible security, option, or warrant has been tendered for conversion or exchange, but the underlying security is not reasonably expected to be received by settlement date.71 Rule 203(b)(2)(ii) as adopted provides that in all situations, delivery should be made on the sale as soon as all restrictions on delivery have been removed, and in any event no later than 35 days after trade date, at which time the broker-dealer that sold on behalf of the person must either borrow securities or close out the open position by purchasing securities of like kind and quantity.


So convertible debts for example create “marked short sales” and FTDs if they are not delivered right away. This is the cause for huge numbers in Daily Reg SHO and also FTDs. You commonly see these massive T-Trades at the end of the day in some securities which are a good sign of dilution but trades executed throughout the day from the debt conversion will all be marked short in accordance with SEC Rule 203. This is to protect the MM due to the possible restriction still being in place during settlement. In fact it is not uncommon for debt holders to sell their shares while still being restricted, they have their letters for conversion to act on.

This commonly creates huge FTDs and trips threshold flags for days leading to speculation that there is a massive short squeeze coming. Sorry to say that no in fact it is 99% of the time due to financiers selling shares before their restricted legend is removed and they have up to 35 days to cover those trades as you can see. During normal market making if there is a trade that becomes an FTD the MM has 13 days to cover the trade and is forced to buy in at that point.

There is another type of trade that causes a “marked” short designation and that is an internalized order. This is caused by someone using a “market order” rather than a limit order. When such an order is placed an MM gets to make money on the spread here, and typically what happens causes some L2 watchers to cry. It is imperative that people use limit orders for this reason because market orders can really create money for MMs on huge spreads. The MM has an order to buy shares at the best Ask, it also sees the market order, it immediately sells shares to the Ask short and buys the market order at bid to cover. This often causes shock on both sides as somebody that was best Bid and Ask did not get filled on either order.

This is the only time MMs make money on the spread here in the OTC, otherwise it is all additional fees charged by your broker to pay for the transactions.

This is what short sales are, they are not actual short positions and they are not Abusive Naked Short Sales, they are simply trades marked short for temporary moment in time. Unfortunately the information is often touted and manipulated to make stupid conclusions of shorting against a security. In fact websites have sprung up providing this information as some type of trading knowledge to be used in making trade decisions. Unfortunately it is all fodder and is of no use to anyone other then regulators to track settlement of trades from initial execution to final settlement. I have seen it all including adding everyday totals to come up with fantastic claims that “OH MY GAWD 320% of the float has been shorted on XXXX!!!!!!!!!!!!!”